奧馳亞 (MO) 2017 Q2 法說會逐字稿

Good day, and welcome to the Altria Group 2017 Second Quarter Earnings Conference Call.

Today's call is scheduled to last about 1 hour, including remarks about Altria's management and a question-and-answer session.

(Operator Instructions.]

I would now like to turn the call over to Mr. Bill Marshall, Vice President, Investor Relations for Altria Client Services.

Please go ahead, sir.

Thank you, Lisa.

Good morning, and thank you for joining us.

We're here this morning with Marty Barrington, Altria's CEO; and Billy Gifford, Altria's CFO, to discuss Altria's 2017 second quarter and first half business results.

Earlier today, we issued a press release providing these results, which is available on our website at altria.com and through the Altria investor app.

During our call today, unless otherwise stated, we're comparing results to the same period in 2016.

Our remarks contain forward-looking and cautionary statements and projections of future results.

Please review the Forward-looking and Cautionary Statement sections at the end of today's earnings release for various factors that could cause actual results to differ materially from projections.

Future dividend payments and share repurchases remain subject to the discretion of Altria's board.

The timing of share repurchases depends on marketplace conditions and other factors.

Altria reports its financial results in accordance with U.S. generally accepted accounting principles.

Today's call will contain various operating results on both a reported and adjusted basis.

Adjusted results exclude special items that affect the comparability of reported results.

Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release.

Now I'll turn the call over to Marty.

Well thanks, Bill, and good morning, everyone.

Based on strong tobacco operating company performance, Altria delivered solid results in the second quarter and first half of 2017.

The smokeable products segment generated strong income growth despite a large cigarette excise tax increase in California and the smokeless products segment has largely rebounded from its first quarter voluntary product recall.

We grew adjusted diluted earnings per share 4.9% in the second quarter and 3.3% for the first half of 2017.

The smokeable products segment delivered 6.4% adjusted operating companies income growth in the second quarter as strong pricing more than offset volume declines and higher promotional investments.

For the first half, smokable products segment adjusted operating companies income grew 7.2%.

As I mentioned, the smokable segment's results were negatively impacted by California's $2 per pack cigarette excise tax increase, which went into effect on April 1. California is a high-volume state, previously accounting for approximately 7% of total U.S. cigarette industry volume.

Following the tax increase, California's volume contribution dropped to 5%, which drove total U.S. industry volume down approximately 4.5% in the quarter.

In addition, Marlboro has a strong share in California of over 50%.

Thus, Marlboro was disproportionately impacted by the tax increase contributing to its decline of 3/10 of a national retail share point in the second quarter to 43.5%.

We expect these dynamics will continue to dampen Marlboro's share through the back half.

Outside of California, Marlboro's second quarter share remained stable sequentially.

Past experience shows that tax increases of this magnitude are most disruptive immediately following implementation, after which, the rate of decline moderates.

We continue to anticipate and approximate 1% negative impact on industry volumes for the full year as a result of the excise tax increases in California on April 1 and Pennsylvania last August.

Looking to the back half of the year, PM USA recently announced the national expansion of Marlboro Black Menthol 72s, a product PM USA expects will further enhance Marlboro's position in the growing menthol segment and among adult smokers aged 21 to 29.

Moving to the smokeless products segment.

USSTC has largely rebounded from its first quarter product recall.

It delivered 9.8% adjusted operating companies income growth in the second quarter.

USSTC grew smokeless products volume 1.4% in the quarter and gained retail share sequentially, growing 6/10 of a share point over the first quarter.

USSTC estimates that the recall had about a half of a share point impact on its total retail share in the second quarter.

And Copenhagen continued to gain ground in the second quarter, growing 7/10 of a retail share point to a record share of 34.1%, that was a particularly strong performance as it lapped the Copenhagen Mint national expansion in 2016.

Through the first half, Copenhagen remains both the largest and the fastest-growing smokeless tobacco product in the U.S. On a combined basis, Copenhagen and Skoal retail share declined 7/10 of a share point in the second quarter, driven by Skoal's 1.4 share point decline.

For the first half, combined Copenhagen and Skoal retail share declined 6/10 of a share point.

The smokeless products segment delivered 1.6% adjusted operating companies income growth for the first half of 2017 as higher pricing was partially offset by the first quarter recall.

Now that the product recall is complete and trade inventories are substantially replenished, USSTC is well positioned moving into the second half of the year.

Finally, an update on our innovative tobacco products' efforts.

In e-vapor, Nu Mark's MarkTen brand continues to grow volume and retail share.

It is currently the #2 e-vapor brand nationally, with a second quarter national retail market share of approximately 13% in mainstream channels.

MarkTen is now present in stores, representing nearly 65% of e-vapor volume in those channels.

And amongst stores with MarkTen distribution through the full second quarter, MarkTen's retail share was approximately 24%.

We're pleased with MarkTen's progress and Nu Mark plans to continue growing the brand in the back half.

In the heated tobacco, the FDA began its substantive review of Philip Morris International's modified risk tobacco product application for iQOS in late May.

The FDA published PMI's executive summary and research summaries to its website for public review and comment, and the agency plans to publish additional sections of the application on a rolling basis.

We continue to work closely with PMI throughout the review process.

As a reminder, PMI submitted its premarket tobacco product application for iQOS to the FDA on March 31.

Our team at PM USA continues to build its U.S. commercialization plans, which we look forward to sharing with you in the future.

I'll wrap up with guidance.

Obviously, our business fundamentals remained strong.

We continue to expect higher adjusted diluted EPS growth in the second half of the year as some first half headwinds moderate and because the fourth quarter will include equity earnings from our beer investment, whereas the fourth quarter of 2016 did not.

As a result, we are reaffirming our full year guidance of 7.5% to 9.5% adjusted diluted EPS growth.

Here's Billy for more details on our performance.

Thanks, Marty, and good morning, everyone.

I'll start with the smokeable products segment.

As Marty discussed, cigarette industry volumes declined approximately 4.5% in the second quarter, impacted by the significant cigarette excise tax increase in California.

The smokeable products segment's reported cigarette shipment volume declined 2.9%, moderated by trade inventory movements.

When adjusted for these inventory movements, PM USA's cigarette shipment volume was down an estimated 5%.

For the first half, cigarette industry volumes declined by an estimated 3.5%.

The smokeable products segment's cigarette shipment volume decreased 2.8% on a reported basis.

When adjusted for trade inventory movements, PM USA's cigarette shipment volume declined an estimated 4%.

The cigar business continues to perform well, delivering volume growth of 13.1% for the second quarter and 12.7% for the first half of 2017.

Smokeable products segment adjusted OCI margins expanded by 1.6 percentage points to 51.7% in the second quarter, driven by higher pricing.

For the first half, adjusted OCI margins expanded 2.2 percentage points to 51.4%.

In the smokeless products segment, industry volume grew an estimated 1% in the past 6 months.

USSTC's reported shipment volume grew 1.4% in the second quarter but declined 1.7% in the first half due to the recall.

Smokeless products segment's adjusted OCI margins increased by 7/10 of a percentage point in the quarter to 70%, driven principally by higher pricing, partially offset by higher SG&A spending and unfavorable mix.

For the first half, smokeless products segment adjusted OCI margins decreased to by 1.1 percentage points, primarily due to the recall, partially offset by higher pricing.

Looking ahead, we expect to see some impact on the smokeless category from California's excise tax increase on smokeless tobacco products, which went into effect on July 1. California accounts for roughly 4% of U.S. smokeless industry volume and we expect the average price per can in California to increase by over $1 or approximately 25% in the third quarter.

Turning to our alcohol assets.

Ste.

Michelle faced headwinds in the first half, largely due to trade inventory reductions and increased competitive activity.

In recent quarters, we have observed a slowdown in premium wine category growth in measured channels, and the trade ended 2016 with excess inventory of Ste.

Michelle products.

As the trade reduced their inventories, Ste.

Michelle's shipment volume was negatively impacted, down 12.4% for the first half.

Ste.

Michelle is working closely with its major distributors to manage through this and believes that volume trends will improve in the second half versus the first half.

In beer, adjusted equity earnings from our investment in Anheuser-Busch InBev were $142 million in the second quarter, reflecting AB InBev's first quarter results, which it reported in May.

This excludes a $408 million gain related to AB InBev divestitures in the quarter, which were planned as a closing condition of the SABMiller business combination.

I'll wrap up by underscoring our ongoing commitment to return cash to shareholders.

First, through the first half of 2017, we paid shareholders nearly $2.4 billion in dividends.

Second, we repurchased $1.6 billion in shares, leaving approximately $335 million in the program as of June 30.

This week, our board authorized a $1 billion expansion to the share repurchase program.

We expect to complete the $4 billion program by the end of the second quarter of 2018.

That concludes our prepared remarks, and Marty and I are now happy to take your questions.

While the calls are being compiled, I'll remind you that today's earnings release and our non-GAAP reconciliations are available on altria.com.

We've also posted our usual quarterly metrics, which include pricing, inventory and other housekeeping items.

You'll see that we've included a few additional data points on the discount cigarette category.

This is in response to a few recent questions we received on that topic.

With that, operator, do we have any questions?

(Operator Instructions) Our first question comes from Vivien Azer with Cowen and Company.

Thank you so much for the additional disclosure, maybe I can start there.

While we don't have a time series, I suspect part of the 40 basis point gain that was we saw for deep discount is, of course, coming from some of the disruption that we're seeing in California and Pennsylvania.

But if Nielsen is any guide and some of the other public company competitors closures is a guide as well, deep discount has been gaining share already prior to what's happening in California and Pennsylvania.

And if that's the case then, Marty, I was just hoping to get your thoughts on why you think we're seeing that dynamic.

Yes, we can -- I'll get Billy maybe to talk about geography in a minute, but there -- when we look at it, it looks like churn in the discount category to us.

The gain in deep discount -- so for reference for people who -- we're referring to the quarterly metrics report where we've put these data in that Billy referenced, and we showed there that the discount category has not grown year-over-year.

In fact, it's essentially flat, down 1/10.

But there is some difference between the branded discount, which is down 5/10 and deep discount, which is up 4/10, so looks to us like it's basically churned there.

I mean, importantly, for us, there does not appear to have any significant effect on Marlboro or in L&M.

Indeed, if you look at the share chart in the earnings release, you can see that the discount category for us was actually up 1/10 over the half.

Bill can talk about the geographies, but there's no question that when you have a major excise tax increase in the state, some people do trade down.

I don't know, Billy, do you want to talk about discount?

Yes.

Vivien, basically, with discount, and as Marty mentioned, it's a discount phenomena, tends to be consolidated through the middle of the country and down into the Southeast, and it really is trading within that discount category.

I would say, L&M, our discount brand, is well represented in that category and it's doing exactly what we want, which is grow share while not growing the overall discount category.

That's helpful.

Maybe just as a follow-up to that then, seemingly, then we're talking about distinct segment of the total smoker population.

So Marty, can you offer any comments kind of the health of the smoking population broadly from an economic standpoint, and then specifically perhaps that lower-end smoker?

Yes, sure.

Overall, Vivien, I would say that we continue to have a largely constructed view of the economic situation of our consumer.

Unemployment's down, housing's up, wage gains are starting to come through, all of the stuff that we talk about all the time, so we won't repeat that, that looks to us to be pretty stable.

Gas prices are up little bit but not remarkably so, in a way that affects our business.

I think what you maybe getting at, though, that there is a segment of consumers in our category who will go into the store and ask the clerk for the lowest-priced brand, and they may be picking up some share there.

But again, it appears to be coming out of, perhaps, the branded discount segment without -- certainly no effect on our brands, and we don't see it in premium, generally.

I hope that's helpful.

Your next question comes from the line of Adam Spielman with Citi.

Just to follow Vivien's question.

I guess you're talking about, within discount, you're seeing this churn.

And I was just wondering whether you've seen deep discount as innovating in any way, or whether your sort of major competitors have somehow deemphasized their discount brands.

So that'll be my first question.

I do have a completely separate question on buybacks, that we'd also love to ask.

Sure.

Thanks for calling.

And we do not see that.

I think it's basically a function of price, Adam.

Fine.

And then on buybacks, I, at least, was surprised by the consumer buybacks in this quarter.

I know you've increased your guidance.

But is this quarter -- the guidance, what you did in 2Q, does that tell me anything about the run rate we should expect for Q3 and Q4?

Yes, thanks for that question, Adam.

I wouldn't read anything into any particular action.

We really monitor the marketplace.

We have a disciplined approach to share repurchases, and it really is dependent on market conditions that we see in the marketplace at the rate that we're going to buy shares back.

I think if you put it in context of the whole and you go back to when we began share repurchases, in 2011, you can see it's been a great investment of our excess cash.

Fine.

And then my final question.

You've obviously left your guidance for EPS unchanged for the full year.

And the question is, how can you alter it in any way, your assumptions about beer and the contribution from beer?

And maybe as you perhaps increase your buyback assumptions, that's being offset by slightly different assumptions for beer.

I guess the honest answer is...

Baked into that EPS guidance.

Yes, I think I understand the question, thank you.

That's why we do a range.

And I think the range is sufficiently broad that you can predict your EPS with perfect prescience.

You would put out a number, but you can't, of course, because of dynamics.

Again, you see it again this year as well.

And so we try to have the range to be broad enough to cover all that.

We put our best thinking into what we can do within the range, so that does include what we expect out of our beer investment.

So the answer is yes, it's all in the guidance, and we think the range is sufficiently broad to cover it.

I mean, it hasn't changed basically enough to form assumptions with beer within that?

No, no, I don't think so.

I think it's -- we were thoughtful about putting the guidance together at the first of the year, and I think that we are comfortable with the guidance range we have at this point in time.

Your next question comes from the line of Michael Lavery with Piper Jaffray.

You have the share in Marlboro falling more than your discount piece of your portfolio, like you pointed out, and so there's some unfavorable mix there.

You also mentioned in your prepared remarks some higher promotional investments, but your smokable price mix in total is not a strong number.

Can you just give us a sense of how you think about the promotional lever?

And related to that, obviously too, there was a good margin lift in that segment.

Was pricing the only or primary driver?

Is there some other pieces there?

How should we think about kind of the run rate and outlook there?

Okay, let me try to tackle those.

I think you know what the strategy is.

We're trying to maximize income in the segment, and that's a balance between that and making sure we have momentum on the key brands, including Marlboro.

So the share in Marlboro is down, primarily because of the California effect, but other metrics on Marlboro continue to be strong, its equity is great.

As you can see, we've got very good pricing through the first half, Michael.

The demographics have stabilized since Marlboro architecture.

We just had a massive increase in California.

We over indexed in California, and so I think that explains that.

A competitive environment, I think we would describe as it's always competitive.

It may be useful for a couple of comments on that.

One is, if you think of competitive activity as occurring within, say, a band, it looks to us like the competitive activity remains within the band, although perhaps a bit on the high side of the band.

We have some promotional launches and some promotional activity from other competitors, but we monitor that carefully, as you know, and what we basically do is we adjust as we need to adjust.

So I think it's pretty steady as she goes, and we're very happy.

When you look at the income performance in the smokable segment of more than 7% for the first half despite the California increase, I think that they're doing a great job over there, in line with their strategy.

That's great.

That's helpful.

And then just one on iQOS.

Can you give a sense of how you think about some of the contingency planning.

Obviously, the FDA comment period alone runs through mid-December, so even early '18 for a decision might be a little optimistic, but perhaps as soon as that or realistically, it could be 2 or even 3-or-something years before you hear, just knowing how that can go.

How do you think about resource allocation, given some of that uncertainty?

And if it is sooner than later, how quickly could you be able to activate some of your commercialization plan?

Yes.

Look, we're preparing to be ready on the nominal timelines that the FDA has said with respect to approving those applications.

Your question correctly implies, of course, that's not completely within our control and it could take longer than that.

That's why we're investing in with discipline.

We're trying not to overspend on the front-end, but we would certainly make the appropriate investments once we know we're go.

So the way we look at it is, we're going to be ready at the earliest moment to proceed expeditiously.

If it turns out to be longer, we have contingency plans in place to do that.

It's just not within our control, so we try not to fret too much about that, we just try to be ready when we can go.

Our next question comes from the line of Chris Growe with Stifel.

I wanted just a bit of a follow-on to an earlier question.

And forgive me if you said this, but I just was trying understand if you could frame the elasticity in California.

And related to that, there are a couple of other companies that have talked recently about less C-store trips.

I was just curious if you're seeing that as well, if that's been a factor at all in your business?

I'll take the second one first, and then I'll ask Billy to comment on the elasticity question, Chris.

We have not observed that in our category at C-store.

We've been reading carefully the reports.

We've seen others comment on that.

But at least, with respect to our category, we have not seen that yet.

Yes.

Chris, in regards to elasticity, what see in the marketplace, looking at other states that have had large increases, as you see it dip down there is consumer reaction just following an SET increase.

There's a bit of trade-down that takes place as they digest that price increase in the marketplace.

And then we see it return to normal elasticity through time once they've digested and felt comfortable with where cigarettes are priced.

So through time, it has been negative 0.3 elasticity that we see through time.

So your expectations for the California plus the Pennsylvania drag, the 1 percentage point drag on volume, would likely include some improvement as we go ahead in future quarters.

Still obviously a negative, but some improvement in the way the consumer reacts.

Yes.

Chris, when we look at other states, we see that improvement take place.

It's just -- it's hard to predict exactly how long it's going to take based on the level of the increase for the consumer to get comfortable with cigarette prices again.

Okay.

And just one follow-up, if I could, on Copenhagen.

Just to understand, I think you've said there was still a bit of a share, market share drag, of like 50 basis points on that brand.

Is that just as trade inventories are building back to normal levels?

Are you kind of at a point here where you don't see that residual effect continuing in the second half of the year on the share?

Well, you see the -- on almost all the metrics, the business bounced back terrifically in the second quarter.

It's just that when you're out of the market and you lose your share, it just takes longer to gain the share back.

And so I think we said at the first quarter call that we expected to gain that back over the course of the year, and we were trying to point out about the gain that we made in the second quarter of, I think, 6/10, sequentially.

So I think we'll get it back over the course of the year, but it doesn't bounce back immediately.

Our next question comes from the line of Judy Hong with Goldman Sachs.

So first, just a quick follow-up on Marlboro.

Just kind of thinking about the third quarter volume because clearly, in the second quarter, you had the benefit of the favorable inventory movement.

If I kind of extrapolate the inventory sort of getting back to normalized level and then you have a bit of favorable -- sorry, unfavorable comp in terms of the third quarter, could we see volume down, something like 10% on Marlboro?

I'm just kind of thinking about the magnitude of some of this inventory movement.

Well, I'll speak to the inventory movements, so I won't speak to guidance on volumes, particularly around numbers because you know we don't do that.

But you're right to point out the factors.

We have -- we do have some trade inventory, as we pointed out in the metrics report that's built in the second quarter.

And as you know, Judy, the -- it all kind of normalizes over the course of the year.

And so in the back half, that will pay itself back, I'm sure.

I know you remember, we have 1 fewer shipping day in the third quarter, and then we have to work our way through this effect that Billy was just discussing with Chris about the volume declines that are resulting from the cigarette excise tax increase.

So those are all the dynamics, but we have not put out the number of our third quarter volume.

Okay.

And then, Marty, just kind of looking at some of the recent trends for e-vapor category, it looks like growth has reaccelerated, at least in the major channel data.

So -- and clearly, some of that is being driven by MarkTen XL, so just wanted to get a sense of kind of the broader industry momentum that you're seeing, how sustainable do you think, just from a category perspective.

And then to some extent, if you go back 2 or 3 years ago, there was a little bit of a shift of combustible volume into e-vapor.

So is that something that you're starting to see?

Or just kind of get a sense of the broader e-vapor category trend.

Yes, let me share with you some of the macro data that we have, just to get everybody oriented.

In '16, we estimated that the spend in the category was about $2.5 billion, that was flat to 2015.

But we have seen a pickup, both in volume and in dollar sales in 2017, so I don't know, maybe 8% on volume year-over-year.

And then there has been some price mix, as you know.

A lot of that is driven by MarkTen, which has really gotten traction with the consumer, and we've put out some share numbers on that today.

The other phenomenon that's happening in the category, as I know you know, is there's poly-use.

So adult tobacco consumers do shift between segments of the tobacco category, and I think that what you're seeing, as vapor moves up and down, and maybe even MST, as you see people moving among and between those categories.

I think those are all factors that go into the growth rate for vapor.

And then, of course, when there's new technologies that are put in the market, we find high trial, and that drives some of the growth.

Okay, that's helpful.

And my last question, just on iQOS.

Can you give us some update on how much you've discussed the various jurisdictions on sort of the tax structure or any kind of regulatory structures around iQOS and what kind of feedback you've gotten so far?

Yes, we have an engagement plan that we're talking to public policy officials, to state tax officials and others.

And I am encouraged that there is, I think, a more broad acknowledgment among public policy of people these days that harm reduction is the way forward and that tax policy will be an important component of that.

It makes good sense to try to encourage people to migrate to products that may hold out less harm.

We are particularly pitching that in the states, but as you know, state excise tax structures are highly complex and idiosyncratic by state, so the reception varies from state to state.

But we are out there sharing our views about that and trying as best we can to persuade people to be thoughtful about that.

Your next question comes from the line of Bonnie Herzog with Wells Fargo.

This is Patty Kanada, on for Bonnie.

Just a question on smokeless.

Could you give us a little bit more color on where you are in terms of replenishing trade inventories?

It seems that there may be some residual supply constraint.

And then in terms of the consumer, has there been any pantry loading going on or trade-down or brand switching?

And does your guidance assume consumers entirely come back once this issue is fully resolved?

Okay.

We have noticed that some people have commented on that, so I'm glad to have the chance to talk about the replenishment.

Actually, I think it's going pretty well.

If we look at -- when we went back and looked to some data through June, with a small exception of maybe, I don't know, call it, 2, 3 or 4 SKUs, all of the orders were being completely fulfilled.

So that's a pretty quick snapback from a recall and a transition from a 2-factory environment to a 1-factory environment.

I'd like to take the occasion to congratulate the UST team on such a good job.

There was a brief hiatus during the July 4th holiday.

Our people have been working very hard in the factory, and we gave them an appropriate July 4th holiday.

And there was a short period there where a few more SKUs were not available and we had to limit some orders.

But on the whole, the vast majority of the SKUs are at full fulfillment.

And as you can see from the numbers in the second quarter by the smokeless team, I think they've done a very good job.

So our view is, is that we're pretty much back in business in the smokeless business.

We have not seen any pantry loading that I'm aware of.

Okay, great.

And just one other question, on menthol.

We have San Francisco's ban possibly going into effect next year and a few other cities looking to similar legislation.

What are you seeing on the ground in those places and where do you think this all goes?

Well, there's a group of people that are trying to take decisions away from other adults, and we oppose that.

And we thought that was very bad public policy.

You know our position on menthol because we have articulated it extremely thoroughly at the FDA.

And as a matter of first instance, if there's going to be anything done on menthol it ought to be done by the agency that has the expertise to assess whether the science and the evidence supports it.

In our view and the view of many others who waited on the FDA is that there is not.

For San Francisco to try to create its own set of rules out there doesn't seem to be good public policy to us.

But this happens, local jurisdictions have views about tobacco issues and while we fight them, they go ahead and we implement them.

Obviously, it's a tiny fraction of the volume.

Your next question comes from the line of Matthew Grainger with Morgan Stanley.

First question.

I guess, as we think about some of the comparability headwinds for the third quarter that you mentioned and how to model the back half, generally, I wanted to also ask about the pricing outlook.

Because in 2Q, you had strong price mix in combustibles, but there was the benefit of earlier timing of the price increase.

And you did incur some inventory buildup, which we talked about earlier, that I'm assuming will probably unwind in the second half and result in some higher promotional expense flowing through.

So is it fair to directionally expect price mix to moderate a fair amount in the next quarter or in the back half, relative to what we saw here in Q2?

Well, I don't want to talk about forward pricing, as you can appreciate.

And I think that the dynamics are well understood, Matt, about what we have out there.

I try to articulate them in terms of the inventory, but I would -- I'm not going to talk about forward pricing, of course.

Okay, understood.

And just to follow up on Patty's question on the San Francisco menthol ban.

I know you've sort of been down this road from a legal perspective before with the flavored smokeless in New York.

I mean, given how the bill is written and your experience trying to litigate these types of bans in the past, how optimistic are you that this could potentially be reversed?

Or is it kind of a done deal once it's implemented at this point?

Well, there are other jurisdictions that have implemented, and my guess and what I would say, is that while the continue to think we have strong arguments, it's fair to observe that we have not been able to block them in other jurisdictions.

It always depends a bit on state law and other factors.

But we'd like to have public policy deferred to the experts, but they often don't and sometimes, the courts are reluctant to interfere with that.

So it can be uphill.

Okay.

And just one last one.

Can you give us an update, just from a legislative perspective, on some of the agricultural bill amendments related to deeming regulations and where those stand at the moment, just your level of optimism, if that could move forward?

I hope so.

It's in the AG bill, as you know, and I thought that we were happy to get it past the committee.

And that predicate date really needs to be changed.

I think there is widespread understanding that the predicate date issue should be changed.

It's a very, very complex environment in Washington, to state the obvious, and so we'll have to see where it goes in the budget.

But I think that there is a lot of support for that amendment, and we continue to work that very, very hard.

(Operator Instructions) Your next question comes from the line of Jenny Kaplan with Bloomberg.

I am interested in just hearing, I know this morning, the BAT CEO was talking about how they're planning to apply to the FDA for their Glo product.

So I'm wondering how that impacts your plan and how you think about the competitive environment as you work with Philip Morris to introduce iQOS.

Right.

Well, thanks for your question, and appreciate you calling in.

As you might expect, I've been spending my time this morning thinking about this call, so I didn't have a lot of time to review the BAT material.

I did see the headline on statement, apparently, that they're going to pursue an FDA application for Glo.

Our plans assume the following, which is because the application is in by PMI in the United States, and we're working, and we expect to have first-mover advantage, but our plans also assume in our category that we will have competition.

So I think both scenarios are covered.

Your next question comes from the line of Vivien Azer with Cowen and Company.

On iQOS and the dialogue that you're engaging with at the state level, if my understanding is correct, the consumables will be subject to the MSA, subject to the FET and selectively subject to state excise taxes.

Can you give us a sense of what proportion of states or U.S. volumes would, in theory, tax iQOS as a cigarette, absent any change in the statute?

Most of them.

Got it.

And then my other question is on minimum age increases.

I know California is probably a little bit hard to read because of the overlap with the state excise tax.

And while Hawaii is small, it's really our only kind of clear example, and given that there looks to be some movement in New Jersey and, possibly, Oregon, on that front, is there anything that you can offer in terms of your insights around how raising the minimum purchase age in Hawaii impacted the market?

Yes, it's too small and it's so idiosyncratic because it's an island, that it's just hard to extrapolate from it.

I think we had said previously, when we studied California, that we had not seen any significant effects there.

And obviously, we'll be monitoring New Jersey very carefully.

Your next question comes from the line of Michael Lavery with Piper Jaffray.

Just wanted to revisit Nat Sherman.

It's I think a couple of quarters now that you've owned it.

Curious, some of the status there, are you still developing some plans for what to do with that?

Have you begun doing any expansion of distribution?

What's sort of the status on how you think about that brand?

Yes, we're -- the integration is well underway.

I think that we're doing very well against the plan we have.

We're working on the branding strategies now, obviously, getting our arms around the factory.

And we'll have more news on Nat Sherman in the back half of the year.

But we're very pleased with how it's gone so far, Michael.

At this time, I would like to turn the call back over to Bill Marshall for closing remarks.

Thank you, all, for joining our call this morning.

If you have any follow-up questions, please contact us at Investor Relations.

Thank you.

This concludes today's conference call.

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